4 Psychological Pitfalls That Will Blow Your Account

Jack is a professional trader. He makes all his money trading the Forex market. He has been trading for five years. He is patient, disciplined and, in his trading, he is fearless.

Meet Tom:

Tom is a newbie. He barely manages to break-even with his trading. He has been trading for six months. Tom takes unnecessary risks as he is undisciplined, and he panics when he takes a trade.

Let’s imagine we have a super profitable system. On paper, traded mechanically, this system has an average of seven wins from ten trades. Now, let’s imagine we give both Jack and Tom this method and they trade it.

What do you think will happen?

Jack will take the system, take the trades, and make a lot of pips. In fact, Jack will probably improve the efficiency of the system and bump it up to eight winners out of ten.

Tom will take the system, take the trades, and pretty much screw it all up. As I said, trading it mechanically will give Tom an average of seven out of ten winners. However, Tom will be lucky to get five out of ten winners.

Why does it work this way?

It all comes down to two things; psychology and experience.

There isn’t much you can do about experience. However, as I mentioned in my last article, you can do something about psychology. So let’s take a look at some of the dangerous psychological pitfalls. Hopefully, after reading this, you will be able to see them coming and stop them, before they destroy your account.

4 Psychological Pitfalls

1. The Desire to be Rich

The desire to be rich manifests itself in many ways. The main ways are fear and greed and they inevitably lead to other problems. If you think about it the majority of the issues newbie’s have stem from the desire to be rich. Things such as:

Over trading

Poor money management by risking too much

Forex will not make you rich in the short term. It will likely take years before you’re trading well enough to leave your day job. Forex is a career and in the long run, if you’re successful, it can give you a very relaxed life. However, if you started trading last week and you plan to quit your job in six months, because you anticipate being rich enough to buy a Ferrari, you are delusional.

This is a career, not a get rich quick scheme. If you want to be rich quick hit the casinos. You have a better chance of winning there.

2. Fear of Losing

From a young age, we are taught that money is important. That without money you have no real value. We are conditioned into believing, that to be successful when we grow up, we must have lots of money. This in turn causes people to be afraid of losing money. This is because the reverse is also true. If you lost money then you are a failure as it is the opposite of making money. This in turn leads to some newbie traders being afraid to pull the trigger and actually taking a trade. Some newbie’s trade demo accounts for two years, never summoning the courage to open a live account. Some newbie traders with live accounts panic whenever they enter a trade and, in turn, make rash decisions.

Take a look at people like Richard Branson, Donald Trump, Alan Sugar and Warren Buffet. These guys are all billionaires (or close enough to it) and each of them has failed many times. Richard Branson has spearheaded many failed ventures. Did those failures set him back though? Hell no! The man is going to start flying people to space at $200k per head, next year, with Virgin Galactic.

I think losing some money to the markets is actually beneficial. It teaches you some very important lessons. What is damaging is the fear of losing money. The fact that you think about it puts you at much greater risk of it actually happening. You have to trade with a positive attitude. So get rid of those fears and worries, they will not do you any good.

The truth is you are going to lose money to the markets, it’s unavoidable. Every professional trader has lost money. Not every trade will be profitable. The market simply doesn’t always work in your favour, and there are times, especially as a newbie, that you will be stung. If you end up blowing your first live account... so be it. As long as you pick yourself up and try again, you will be a better trader for it. I blew two accounts before I started trading profitably.

3. The Need to be Right

This is a good one. Tom opens his platform and enters a dumb, baseless, long trade. He targets 100 pips and has a 50 pip stop loss. The trade goes against him immediately.

It goes down, first ten pips, then twenty pips, and then thirty pips. When it reaches fourty pips, Tom decides he doesn’t want to lose another trade and moves his stoploss down.

The price keeps falling and Tom continues to move his stop.

100 120 150......

Eventually Tom closes out his trade and he has lost a huge portion of his account.

Tom was not able to accept that he has taken a losing trade. He kept pushing the stop down in the hope that it would eventually turn around. The need to be right is an account killer.

4. Being Undisciplined

I saved this one for last because, even though it is one of the most common and dangerous pitfalls, it is rarely discussed. A trader who lacks discipline can never make it in this business. Many traders are guilty of lacking discipline for many different reasons.

The main culprits are what I like to call ‘System Jumpers’. These are traders that are constantly tweaking and changing their trading methods. These traders do not realize that learning to trade a system efficiently takes time.

System Jumpers are traders who lack the discipline to stick to, and learn how to trade, a system. They try it for a week and when it doesn’t work they jump to the next system or method.

Another common action of an undisciplined trader is abandoning a perfectly good trading method. Every trading method has periods in which it performs below average. My trading method averages 80% winning trades however some months it drops down to 60%. This is because market conditions change. No matter how versatile a method is it cannot perform, at peak efficiency in all market conditions. A true trader has the discipline to stick it out through the hard times.

If you like this post leave a comment please.

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58 Responses

Hey Nick. I’m a Noobie, trading live in my first week after 3mo of demos. Trading question: On a trend, do you let it hit your “take profit” or do you let it run until the next reversal? I’m also guilty of most of the above……………..

Great article. I have been trading forex for three years and lost some money in the process. I wanted to trade to make money quick so that I can leave my job as soon as possible . I have since re-evaluate my purpose and mission for wanting to trade and this has made me change my approach. Your article is inspiring. Regards

I’m guilty of almost all of the above. I love this tutorials as they are free of unneccessary forex jargon. You also lay all in a way that lets a newbie like me to be calm and confident while showing all the risks, pitfalls, and hard facts we must accept in forex trading. Thank you. I will be reading and re-reading your posts

Yep, done all of those, bought the T-shirt. Managed to blow 95% of my capital in a crazy over-leveraged losing streak before I found this site. I know it will take a long time to rebuild my account but I’m determined now to learn to trade properly, with patience and discipline.

I have traded on live platform for over 2yrs. I never ate my profit cos i end up loosing everything. I love Forex cos i know its my career. I know after this educative training coupled with constant practice, i will become Pro & make a nice career out of it

Yes I had experience the same deja vue with point number 3. Consistent and consecutive winnings lead me to denial and disbelief. Creating a 50% margin call to my position. I guess the first hit is always the best hit.

Written and laid out in a very concise and professional manner. Easy to read and comprehend, which makes it so easy to follow understand and digest. Makes one think and should assist any novice trader (which I’m one) if followed with patience.

how refreshing to read something based on experience and common sense without any B/S and hype As a total newbie I am grateful to find a sound structured approach I look forward to following you in the future thank you

Having gone through, and still have lapses, all of the pitfalls you raised, I believe that your article is a ‘MUST’ read for all newbies. Understanding and controlling one’s emotions of FEAR and GREED is critical in Forex trading, I believe. So applying the right mindset and discipline, surely, must make for a better trader.

I know that I am better because of it and, through the assistance of people like Nick, expect to become even more assured.

For a newbies to be a profitable trader ..the newbies must be ready to manage their psychology with respect to the market conditions, anticipate controlleable losses, create a risk management strategies along with basic trading tools. the fx market is dynamic..as a newbies you must be ready to move with the dynamism..that is watching the market carefully by making good entering and exit analysis and determining what you are can give out as a loss-fund thereby planing what you can as your profit.. the market is not about making pips .it is about making profitable trades which translates to money in return.

I am glad I stumbled on forex4noobs.com through babypips and for this apt article that mostly sums up my emotions in Forex trading. I have a life account which charged to trade mini and am yet to trade life because I keep watching the losses in demo trading even though my overall return is in the black. Thanks for showing me my pitfall.

Nick, you say the ability to follow your trading rules self-discipline and it’s a crucial factor in being a successful trader – and I agree. But where does self-discipline come from? It’s not just about will power – saying I’m going to follow the rules no matter what. Because if that worked, we wouldn’t be having this discussion.

I think that there are three main issues in trading psychology, and it is their interaction that creates problems for traders.

The first is AMBIGUITY. We don’t know what the market is going to do. We have theories, indicators, systems, etc., that help predict market movement, but none of these tell us what the market is going to do each and every time. Thus, Ambiguity. Traders, even experienced trader, can find themselves wondering if this is the time that their chosen system won’t work and so they break their trading rules.

Second, we all have internal scripting (what we believe is true) about our ability to succeed, about money, about what trading success or failure says about us as a person, about our lovability, about the need to be right, and so on.

Third, we have strategies that we use to make our way in the world. By strategies, I mean how we get what we want and need. If someone tells me “No”, do I sulk or do I throw a temper tantrum? Do I try to get what I want by being charming, cute, intelligent, efficient or knowledgeable? The variations are myriad, but you get the idea.

So how does this play out when we sit down to trade? What happens when we try to handle the ambiguity of the market with our usual strategies? What happens when the ambiguity of the market triggers our scripting? We don’t stick to our trading plan; we move our stops; we hesitate to enter a trade or we get out too soon; we cut down on our lot size after a loss and then the market takes off. All the things we do that prevent us from being profitable are a result of strategies and scripts that don’t work in the face of Ambiguity.

What does work?

A trading plan AND money management principles that produce more money than they lose. Forget about pips; it’s about the money. That is why you are trading isn’t it? There are lots of trading plans out there that will produce money for you if you can consistently follow the rules. Following the rules is the hard part.

Now here is the important psychological part, the part that can get you to follow the rules. It’s not about being calm or emotionless; it’s about knowing at a CONSCIOUS level what you are feeling and saying to yourself. It is only when you are aware of what’s going on internally that you have a chance of preventing it from controlling your trading.

Start with talking out loud. Whenever you are aware of being anxious, angry, hesitant, etc., say what you are feeling. Speak out loud what you are saying to yourself… about the market, about your ability to trade, about the money, about what others are going to think. Remember that all feelings are acceptable; it’s what you do with them that is the important part.

What you are now saying out loud is the raw data, the information you need, to change your behavior patterns. Ask first “What is the emotion I’m feeling?” Then ask, “What am I saying to myself that makes me feel that way?” Next, ask “Is it true?”

Just going through this process will put you in a different emotional state, one in which you have more conscious control over your actions. Once you have the answers to the above questions, you can begin to ask yourself “Is the strategy I’m using to handle my emotions working to make me profitable?”

Your method has helped me a lot I also started using Synapse’s method too. I wish I would of found your website last year I have reloaded my account three times before I started following a solid plan and sticking to it.

Great post, Nick! I am a newb myself, so I faced these problems as well. Thanks to you and this great comunity though, I am pulling myself together. Lost 20% of my account before finding you guys, but now I’m starting to get that back.

Great Post, I think that there are behavioral traits that many recreational traders face as a major obstacle in their trading. Meaning Overtrading, or the need to always be in a trade, entering a trade without waiting for confirmation, either a break of a S/R line or confirmed direction change in an indicator, or whatever a system calls for. BUT its these poor habits that when they come into contact with one of the 4 Pitfalls you mentioned that dooms an account from a single, or a couple trades.

OK, I will! Thanks Nick. This and the last post were excellent. Simple and straight forward. They probably address one of the, if not THE, most difficult parts of trading. Again, excellent posts and thanks.